Taking the Global Economy Hostage

If there is one thing that the Iranian regime is adept at it is hostage taking. Since the seizure of the U.S. embassy in 1979, Iran has used the tactic as a staple of its diplomatic toolkit. We all remember the ordeal faced by the American hikers Sarah Shourd, Shane Bauer, and Josh Fattal, whose detention and trial were based on little other than their U.S. citizenship. At this very moment Amir Mirzaei Hekmati, an Arizona native, is being put on trial in Iran for basically the same reason. These are simply two recent examples among dozens, and while each of these situations are disturbing, they pale in comparison to Iran's latest hostage target: the global economy.

No, I am not being hyperbolic. It is clear that by threatening to close the Strait of Hormuz Iran is attempting to force the United States and the European Union to step back from implementing new sanctions on the regime. Yet it is important to realize that any effort to close the Strait wouldn't just impact America and our allies; it would have truly global implications. This is because nearly a fifth of the global oil supply, approximately 17 million barrels of oil, travels through the Strait of Hormuz every single day. This is oil coming from the world's most important producing nations: Iraq, Kuwait, Saudi Arabia, the United Arab Emirates, and Iran itself. Much of this oil is bound for Asian markets, with major consumers in Japan, South Korea, China, and the rest of the Pacific Rim. By cutting off, or more likely impeding, traffic through the Strait, Iran would singlehandedly impose prolonged shipping times, and costs, for oil delivery. The inevitable result? Skyrocketing oil prices at a moment when the global economy can ill afford it.

Iran might be bluffing, but the tension between Washington and Tehran is as high as it has been in decades, and an unwanted escalation is a distinct possibility. With Iran war-gaming a simulated Strait closing, and the U.S. Navy's Fifth Fleet offering stark warnings, the current situation is reminiscent of the last time that Iran attempted to impede transit through the narrow Strait; the so-called "Tanker War" of the mid 1980s. While the "Tanker War" was initially an offshoot of the Iran-Iraq war, with both countries targeting each others shipping vessels, tankers from other countries were attacked as well. In all, Iran struck 190 vessels from 31 different countries, in what amounted to a broad based assault on international commerce that provoked U.S. intervention, and led to several violent exchanges between the two countries. This experience offers insight into how the current situation could play out. The scary thing is that tensions between the U.S. and Iran are even higher today, and the costs of confrontation could be greater.

Any effort by Iran to close the Strait now would also affect countries around the world. With economies across Asia consuming more petroleum than ever, even a minor supply shock could send oil markets reeling. While it is impossible to predict a precise price increase per barrel, it is important to understand that in a tight oil market even slight supply disruptions can have enormous impact. An American response to an attempted blockade would be inevitable. With the U.S. Fifth Fleet being located near by in Manama, Bahrain, the U.S. would be able to intercede and ensure the continued passage of tankers through the Strait.

The potential silver lining is that such an affront by Iran would draw the ire of China, which has protected the Iranians diplomatically in a range of international institutions. In the end China's real interest is in "energy security" -- something that in this instance translates to the unimpeded passage of commerce through the Strait. Could this become the event that opens China's eyes to the threat that Iran's erratic behavior poses to its own interests?

When it comes to Iran's other major international backer, Russia, things don't look as hopeful. Moscow would reap a windfall profit from such an event with higher prices and uninhibited exports. But in the long run it is important that Russia realize that a healthy global economy is crucial to its own commodity export based growth strategy. Surging global oil prices could well tip a teetering European Union over the edge, and ultimately weaken demand in the E.U., the final destination for 80 percent of Russian oil exports.

The bottom line is this; even if this situation settles down, Iran has once again revealed itself as a uniquely reckless, confrontational, and unpredictable threat. Tehran already consistently violates international norms and its legal obligations (just look at their human rights record and continued pursuit of nuclear weapons), so perhaps we shouldn't be surprised that it might be willing to attack the lifeblood of the global economy. In a situation where every nation is a hostage, we need a unified international front to counter Iran's efforts at economic blackmail.